EU predicts eurozone recession to continue in 2013

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Friday, May 3, 2013. The European Union is predicting that the recession in the Eurozone will continue in 2013 and that unemployment will stand at record levels

/ AP

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Friday, May 3, 2013. The European Union is predicting that the recession in the Eurozone will continue in 2013 and that unemployment will stand at record levels. In Friday's spring economic forecast, the EU said that gross domestic product in the 17 nations that use the euro currency will shrink by 0.4 percent this year, slightly better that the estimated -0.

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Friday, May 3, 2013. The European Union is predicting that the recession in the Eurozone will continue in 2013 and that unemployment will stand at record levels. In Friday's spring economic forecast, the EU said that gross domestic product in the 17 nations that use the euro currency will shrink by 0.4 percent this year, slightly better that the estimated -0. (/ AP)

RAF CASERT, Associated Press

Europe will take longer to recover from its economic crisis as it tackles a worse-than-expected recession in the eurozone and unemployment at record levels, the European Union warned Friday.

In its spring economic forecast, the EU said that gross domestic product in the 17 member countries that use the euro will shrink by 0.4 percent this year, better than the 0.6 percent contraction in 2012 but 0.1 percentage points worse than the EU had forecast back in February.

The report also had bad news for the wider 27-country EU: it now expects the region's economy to shrink by 0.1 percent in 2013, against a forecast of 0.1 percent growth in February.

"Grappling with the aftermath of a profound financial and economic crisis, the EU economy is set to pick up speed only very slowly in the course of this year," the report said.

The grim outlook even forced EU Commissioner Olli Rehn to raise the specter that France, the bloc's second biggest economy, may be given two extra years to bring its deficit within the target 3 percent of gross domestic product needed for a sustainable future.

With a population of more than half a billion people, the EU is world's largest export market. If the region's economy remains stuck in reverse, order books for companies in the U.S. and Asia will be hit. Last week, U.S.-based Ford Motor Co. lost $462 million in Europe and called the outlook there "uncertain," although the company's global earnings rose 15 percent to $1.6 billion.

After the eurozone crisis over too much debt broke in late 2009, the region's governments slashed spending and raised taxes - either to meet conditions for bailout loans, or to reassure jittery bond markets. But austerity has also inflicted severe economic pain. Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, potentially making it harder to close budget gaps.

The impact of the eurozone's austerity measures and recession are being felt even in the region's more prosperous countries. The EU report forecasts GDP growth in Germany, Europe's largest economy, will fall from 0.7 percent in 2102 to 0.4 percent this year as demand from other parts of Europe falls. France, meanwhile, is expected to fall into negative territory in 2013, with GDP dropping 0.1 percent.

Against such a depressing background, Rehn chided France for the `'persistent deterioration of French competitiveness" and called for `'substantial structural reforms in the labor market."

Instead of moving toward a safe 3 percent deficit, France is forecast to have a deficit of 3.9 percent this year and 4.2 percent next year. The French government said that new legislation is already in the pipeline to cut spending and increase the fight against fiscal fraud to bring its deficit down.

Indications that the eurozone's economy is getting no better could force the European Central Bank into further action. The ECB cut its benchmark interest rate a quarter-point Thursday to a record low of 0.50 percent. Speaking to reporters after the ECB's policy-setting meeting Thursday, bank President Mario Draghi said that the bank was prepared to flex its muscles further, saying it stood "ready to act if needed." But Draghi also implored Europe's governments to do more to stimulate economic growth and, in doing so, generate jobs.

Unemployment across the eurozone is expected to hit an average of 12.2 percent this year, up from 11.4 percent in 2012. In both Greece and Spain it is expected to peak at 27 percent.

Rehn said that `'in view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis."

There are currently 19.2 million people out of work in the eurozone, leaving EU leaders with an uphill battle to turn the economy around while making sure the population continues to back the austerity measures aimed at whipping public finances back in shape.

Rehn insisted that after the 2012 recession, GDP growth is expected to start picking up again in the second half of 2013. He added that, under the assumption of unchanged policies, GDP would even rise by 1.2 percent in 2014.

But overall, the news remained bleak as the report said that `'the recovery of economic activity is expected to be too slow to reduce joblessness."

Not much improvement in unemployment is expected in 2014 and `'differences across member states are expected to remain very large."